The Molis Corporation has the capacity to produce 15,000 haks each month. Curren

Question

The Molis Corporation has the capacity to produce 15,000 haks each month. Current regular production and sales are 10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred:

  

The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10,000 to 15,000 haks per month. Direct labor is a variable cost.
The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak. There would be no selling expense in connection with this special order. And, this order would have no effect on the company's other sales.

Suppose the special order is for 6,000 haks this month and thus some regular sales would have to be given up. If this offer is accepted by Molis, the company's operating income for the month will:

A)increase by $6,000

B)increase by $7,500

C)increase by $5,000

D)increase by $1,500

my answer of B was wrong

Direct materials $5.00 Direct labor $3.00 Variable manufacturing overhead $0.75 Fixed manufacturing overhead $1.50 Variable selling expense $0.25 Fixed administrative expense $1.00

Explanation / Answer

Ans-

D )increase by $1,500

Thank you!!!

Relevant Cost Direct materials $5.00 Direct materials $5.00 Direct labor $3.00 Direct labor $3.00 Variable manufacturing overhead $0.75 Variable manufacturing overhead $0.75 Variable selling expense $0.25 Cost $8.75 Cost $9.00 Sales value $10.00 Sales value $15.00 Increased profit (1.25*6000) $7,500.00 Loss of Profit (1000*6 ) $6,000.00 Net increase 7500-6000 1500 Fixed manufacturing overhead $1.50 Sunk Cost Fixed manufacturing overhead $1.50 Sunk Cost Variable selling expense $0.25 Avoidable Exp. Fixed administrative expense $1.00 Sunk Cost Fixed administrative expense $1.00 Sunk Cost

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